Imran Khan and the PTI party lost the vote of no confidence in his government in the early hours of 10 April, after almost a month of high political drama in Pakistan.
Short-term, back to the PMLN and IMF
The 172 members (51%) of parliament that voted to oust the PTI will likely elect Shehbaz Sharif of the PMLN as the new PM. All parties agree that the balance of payments crisis necessitates staying engaged with the IMF, but there will no doubt be delays related to the change in personnel.
Medium-term, fresh elections soon
The new government, having secured power, might seek to avoid early elections until the end of the current parliamentary term, ie October 2023. However, while the PMLN, with 25% of parliament, will dominate the new government, it will be highly reliant on coalition partners. Whether "anything but Khan" and the imperative to mitigate the risk of criminal prosecution for corruption will preserve unity in this coalition until October 2023 is another matter.
Furthermore, given that Pakistan cannot quickly escape its balance of payments crisis and cannot do so now without unpopular remedial policies, the new government may not want to assume responsibility for a period of economic stress.
Meanwhile, Khan and the PTI will regroup and prepare for the next election, which they will lobby for as early as possible, building on their support base, with shows of strength in mass rallies, on the surface, but also repairing their relationships with the military-intelligence deep-state behind the scenes.
Khan and the PTI have increased their domestic popularity during the course of recent events. The new government and any defectors from the PTI have been tarnished by the "foreign conspiracy" and "horse-trading" narratives (that damage is far greater than any perception that Khan and the PTI have been judged by the Supreme Court as acting unconstitutionally in the cancellation of the original no-confidence vote) — the economy is no longer the central electoral issue.
Khan's ability to campaign and organise rallies is more unconstrained now he finds himself out of government in the coming months, and the main opposition leaders – Shehbaz Sharif of the PMLN and Asif Zardari of the PPP – remain under corruption-related criminal investigations and cases, and that makes them vulnerable should the military-intelligence deep state wish to undermine them at any point.
Long-term, military-intelligence deep state endures
The final act of the drama of the past month is as open to polarised interpretation by investors as it is by the domestic political class and electorate.
Either: a) Pakistan's best hope for difficult, structural reform of governance has been set back.
Or, b) Pakistan has evolved institutionally, resolving a political conflict without resorting to violence or overt military intervention in the manner it might have done a generation ago.
In either version, the military-intelligence deep state has suffered the least — "the house always wins". And perhaps, as long as that is the case, the mass population and investors will ultimately come off second-best.
This is no different from any other country with a deep state. The difference in Pakistan is that the genie of mass discontent successfully channelled by Imran Khan and the PTI over the past decade cannot simply be put back in the bottle.
Polarised politics persist
For his supporters, the corrupt and threatened civilian, military, and judicial elite have returned to power, in cahoots with the US. The domestic and international vested interests most threatened by Khan have successfully banded together to preserve their own position, mitigate the risks of criminal prosecution for corruption, suffocated the agenda to clean up politics – and, by implication, the economy – and sacrificed independence in foreign policy.
For the supporters of the established political parties — Nawaz Sharif's PMLN, Asif Zardari's PPP, and Fazal-ur-Rehman's JUI-F — an incompetent and increasingly desperate populist has been contained within the institutional framework, restoring constitutional democratic supremacy, avoiding violent protest or a military coup, and re-establishing a balance in foreign policy between China and the US.
Domestic politics has been this polarised since before the 2013 election, so this is not a new predicament.
Military supremacy – "the house always wins"
In the past 50 years, Pakistan has had 16 prime ministers, excluding 7 interims, but only 10 chiefs of Army staff, even though parliamentary terms are meant to last 5 years, whereas Army chiefs' terms are meant to last 3 years. Army chiefs have consistently found it much easier to see out their term and secure renewals, compared to their civilian counterparts.
And, so the cycle continues with Imran Khan's loss in the parliamentary no-confidence vote on 10 April, three and a half years after his PTI party secured a majority coalition in the 2018 election. Meanwhile, Army chief Qamar Javed Bajwa is already into his second term and may be in line for another renewal, nominally at the prime minister's discretion, in November.
In the past month or so, Bajwa has publicly stated his 'neutrality' in matters of domestic politics, but this may have been interpreted as a green light to opposition politicians to mobilise. He participated in the National Security Committee on 31 March, which effectively endorsed Khan's narrative of a 'foreign conspiracy' at play in the no-confidence vote. Bajwa also presumably supported Pakistan's abstention at the 2 March UN resolution on Russia, but then publicly criticised Russian aggression in Ukraine on 2 April.
IMF and the balance of payments crisis
The new government, the PTI, and any technocratic interim administration should there be early elections, accept there is no alternative to remaining engaged with the IMF, subject to delays resulting from any change in personnel.
That said, with economic conditions changing fast on the ground, the longer the seventh review is delayed the greater the chance that the programme will have to be renegotiated to reflect updated quantitative benchmarks (and also potentially to provide spending or revenue offsets for the increased fuel and power subsidies).
The IMF said last this week that it "will engage on policies to promote macroeconomic stability, and enquire about intentions vis-a-vis programme engagement" when the new government is in place and that it looks forward to continuing its support to Pakistan, which seems to imply that there is still of a window of opportunity to get the programme back on track when a new government is in place, if it so desires.
Conversely, if the programme falls terminally off track, the risk of a full-blown BOP crisis would greatly increase. However, we believe this risk is already priced in, and that resumption of the programme could unlock some serious upside for Pakistan eurobonds and equities (albeit less so than earlier in the year, given the current political backdrop and elevated inflation and BOP pressures).
Last week's rate hike buys some additional time for the next government to implement needed reforms and reach an understanding with the IMF. This should be supported by further PKR depreciation, which is down just c6% ytd and will need to depreciate further to address Pakistan’s external imbalances (with 12-month NDFs priced 21.5% below the official rate).